Business Context and Reporting Period
Teradata Corporation provides the Teradata Vantage connected multi-cloud data platform, together with consulting and support services. This Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The financial statements are unaudited and prepared in accordance with U.S. GAAP.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $496 million | $491 million |
| Recurring revenue | $386 million | $372 million |
| Gross profit | $301 million | $307 million |
| Gross margin | 60.7% | 62.5% |
| Operating income | $68 million | $81 million |
| Net income | $36 million | $53 million |
| Diluted EPS | $0.33 | $0.47 |
| Cash flow from operations | $151 million | $110 million |
| Free cash flow | $150 million | $105 million |
Operating margin was approximately 13.7% in Q1 2022, compared with approximately 16.5% in the prior-year period. The effective tax rate increased to 34.5% from 26.4%, partly due to higher forecasted GILTI tax associated with U.S. R&D capitalization rules.
At March 31, 2022, cash and cash equivalents were $404 million, and cash, cash equivalents and restricted cash totaled $408 million. Debt included $75 million of current and $324 million of long-term debt on the balance sheet; the term loan principal outstanding was $400 million. The $400 million revolving credit facility had no borrowings, leaving the full amount available, and the company reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 1%, while recurring revenue increased 4% on an underlying basis. Foreign currency movements reduced reported total revenue by approximately 3%.
- Subscription software license revenue was flat at $93 million. Services and other revenue increased to $293 million from $279 million.
- Perpetual software licenses, hardware and other revenue increased 13% to $26 million, while consulting services revenue declined 13% to $84 million.
- Gross profit decreased $6 million, and gross margin declined 180 basis points, primarily because of costs related to ceasing operations in Russia, foreign exchange effects and revenue mix.
- Operating expenses increased 3% to $233 million, reflecting higher stock-based compensation, cloud and go-to-market investments and Russia-related costs.
- Net income declined 32% to $36 million. Share repurchases reduced weighted-average basic shares to 105.0 million from 108.7 million.
- Operating cash flow increased $41 million, driven primarily by stronger collections, favorable working capital and a $50 million CARES Act tax refund.
- Teradata repurchased approximately 5.1 million shares for $250 million during the quarter, including an accelerated share repurchase. Approximately $50 million remained with JPMorgan Chase for additional ASR purchases.
Growth, Guidance, Outlook and Risks
- Annual recurring revenue was $1.427 billion, up 2% year over year, including a 1% adverse currency impact. Public Cloud ARR was $209 million, up 69%, and the cloud net expansion rate was approximately 130%.
- Management ceased operations in Russia during the quarter in response to sanctions related to Russia’s invasion of Ukraine. The action reduced first-quarter revenue by approximately $10 million and is expected to reduce full-year ARR by approximately $55 million and revenue by approximately $60 million.
- For full-year 2022, management projected reported total ARR to decline in the low-single-digit percentage range, recurring revenue to decline in the low-to-mid-single-digit percentage range, and total revenue to decline in the mid-to-high-single-digit percentage range. Public Cloud ARR was expected to increase approximately 80%.
- Management estimated a 3.5% to 4.0% negative currency-translation impact on full-year reported revenue based on April 29, 2022 exchange rates and forecast a full-year effective tax rate of approximately 37%.
- Key risks include foreign currency volatility, macroeconomic and competitive pressures, customer concentration and potential defaults, reliance on Flex and certain single-source suppliers, supply-chain disruption, remote-work and pandemic effects, and execution of the cloud and consulting realignment.
- The company remains involved in litigation with SAP. Certain claims were dismissed, other matters were settled or stayed, and the likelihood and potential range of loss from remaining SAP patent counterclaims could not be determined.
- Management stated that current cash, operating cash generation and available revolver capacity should satisfy anticipated requirements for at least the next twelve months.
Investor Verification Checklist
- Verify the effect of Russia’s exit and currency movements on ARR, recurring revenue and full-year guidance.
- Assess whether strong Public Cloud ARR growth and the approximately 130% cloud net expansion rate are translating into sustainable revenue and margin improvement.
- Review the decline in gross margin and the extent to which Russia-related, cloud-related and foreign exchange costs are recurring or nonrecurring.
- Monitor liquidity, term-loan amortization and the June 2023 maturity of the term loan and revolving credit facility.
- Track completion and final share delivery under the $250 million ASR, as well as remaining repurchase authorization of approximately $963 million.
- Evaluate exposure to the SAP litigation, customer cancellation rights affecting approximately $1.366 billion of remaining obligations, and supplier concentration at Flex.